The Economy

Peter Crabb: Affordable Care Act is similar to rent control

PETER R. CRABB, professor of finance and economics at Northwest Nazarene University in NampaOctober 8, 2013 

Peter R. Crabb

The new year is fast approaching, and the new laws that come with it are approaching even faster. A new health insurance law is coming, but the economics surrounding it is an old story.

This month marks the beginning of the individual mandate under the Patient Protection and Affordable Care Act (PPACA). The mandate goes into effect Jan. 1, but individuals can enroll now in individual health insurance policies with government subsidies through the health insurance exchange market.

Idaho’s exchange market, YourHealthIdaho.org, was supported by Gov. Butch Otter and the State Legislature as a better alternative to a federally-operated exchange. It is expected the state-run exchange will give Idaho health insurance consumers better prices and more choices.

The first point is true because under the new law prices will be controlled. As to the matter of choices, economic theory predicts there will be fewer.

Under the the Affordable Care Act, the rates insurance companies offer each year will be reviewed by government regulators. In some states all rate changes will be scrutinized. In Idaho, only increases of more than 10 percent are subject to review by state insurance examiners.

The states and the federal government now have the power to keep insurance companies from raising prices by what is determined to be “unreasonable and unjustified.” This is a form of price control.

The economy theory of price controls is not a complicated matter. Students in principles of economics courses learn that when the government restricts price changes, consumers face fewer choices. That is, rationing occurs.

Price controls are any policies that set the maximum or minimum price at which a good can be sold. The classic economic model of supply and demand shows that price controls often produce unintended consequences.

Most principles of economics textbooks walk students through the example of rent controls. Like restrictions on health insurance premiums, rent controls are price ceilings — legal maximums on the price at which a good can be sold. Price ceilings below the market price create shortages.

The goal of rent control was always to make housing more affordable for the poor. The Affordable Care Act attempts to do the same for health insurance. However, the supply of goods and services, and particularly necessities like housing and health services, is fixed in the short run. In the long run, supply is strongly affected by price, and therefore, shortages are much larger in the long run than in the short run.

When facing rent controls, apartment owners find other ways to ration the service. Holding prices down results in long waiting lists, discrimination against those with the least ability to pay (e.g., minorities and families with children), and even under-the-table payments to owners or service providers.

Further, the quality of apartments also suffers due to rent control. Similarly, price ceilings in the health insurance market will lower the incentives providers have to deliver quality service to market.

The Affordable Care Act is already resulting in rationing and fewer choices. Both Bloomberg and The New York Times reported last month that insurance providers are trying to avoid government scrutiny of premium prices by restricting consumer choice. Health insurance policy holders will now have fewer providers in their so-called network from which to purchase care.

Like rent control before it, expect to see some rationing mechanism develop in the health care market. One risk is doctors accepting under-the-table payments from their patients.

Policymakers may want to take a step back and slow things down as the new year and this new law approach.

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prcrabb@nnu.edu

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